Wednesday, July 15, 2009
10,000 lenders set their own standards
Summing Up: You Control Your Buying/Investing Power—Not the Lender
ending. Do you want to own your own home? Do you want to own investment properties? Do you want to structure the best way to finance your acquisitions? Would you like to seriously improve your net worth? Would you like to live free of destructive debt? Would you like to achieve financial
independence? Yes. Then start now. It’s your movie. It’s your move.
Envision the property(ies) you would like to own 5, 10, or 15 years from now
What’s the Moral?
As real estate prices throughoutNorthAmerica (and throughout theworld) have skyrocketed during the past five years, many potential first-time buyers and investors feel frustrated. They hesitate to buy and invest. But if you hesitate, you will only lag further behind.
Renters: Make Ownership Your First Priority
Had I continued to rent when I was age 21, I would not have been able to own the upscale house I bought at age 27. Your best chance today to own the home you would like in, say, 5 or 10 years is to first become a property owner as quickly as possible. Weigh carefully the advantages of buying a property that makes you some quick cash (rental income, fixer-upper, bargain-priced foreclosure). Do not complain that prices have gone through the roof (remember, push aside the self-denying, goal-defeating self-talk). Instead, create a financial plan that places you on the fast track to the property(ies) you really want.
Gain a Great Tax Break
Since 1998, tax law has permitted homeowners to sell their homes every two years and pocket their profits tax free (up to $250,000 for singles and $500,000 for married couples). This tax break means that you can buy a bargain-priced fixer-upper, renovate as you live in it, and then sell for a profit (the economy willing) in two years; then repeat as necessary or desired. Want to earn an extra $100,000 to $250,000 (more or less) in tax-free gains during the next four to six years? Weigh buy, renovate, and resell fixer-upper properties.
Reprogram Your Thoughts to Deliver Self-Fulfilling Messages
self-talk. Ask yourself questions. Brainstorm answers. Adopt attitudes and habits that advance you toward the life you would like to live. For example,
- What are six ways that I can save more?
- What are six ways I can cut spending?
- What are four ways I can stop running up credit card bills and start paying them down?
- What are four ways that I can work toward a $1 million net worth within 15 years?
- How can I use real estate to help build wealth?
Self-Defeating Self-Talk Destroys Wealth-Building
- I can’t remember names.
- I’m always running late.
- I can never get organized.
- I’m always short of money. I just don’t know where it goes.
- No way could we ever save enough for a 20 percent down payment.
- No way could we ever afford a property in that neighborhood.
- Get qualified for a mortgage? Not with my credit.
- At the rate we’re putting away money for retirement, I’ll probably be working until I’m 75.
- I don’t believe that infomercial hype. I know that I could never raise enough cash to invest in real estate.
- I just can’t seem to lose weight.
results you really want.
Align self-talk with your priorities
Tuesday, July 14, 2009
Personal versus Financial
Subtle Distinction
Emotional decision makers quickly decide an issue according to their whims of superficial likes and dislikes. They pass by future fortunes for present comfort. For example, do you know people who drive new or nearly new cars with big loans but can’t afford to save or invest in property? How many people turn down bargain-priced fixers because they don’t want to make the repairs? How many renters remain long-term renters because buying would give them a longer commute or place them in a neighborhood that seems less desirable than where they currently live?
Just recently, I erred along these lines. (Yes, even pros can make mistakes—especially when they forget to follow their own buying rules.)
Emotional Delay (or Withdrawal)
In this case, the pro was me. I evaluated an investment property (a singlefamily house).The owner agreed to finance the propertywith just 5 percent down. The property was located in a neighborhood of professionals; it suffered no problems of disrepair or deferred maintenance. However, notwithstanding these advantages, a couple of features in the house turned me off. I hesitated to make an offer. Rather than quickly weighing all advantages and disadvantages, I focused only on what I didn’t like. That was a big mistake. The next investor who looked at the property bought it.My failure to quickly size up the opportunity costme an excellent property that was offered with terrific seller financing.
Avoid Mistakes Similar to Mine
Separate the financial from the emotional—only then will you judge fairly whether the decision exposes you tomore cost than benefit. As humans,we seemto be hardwired with emotional response. Yet, to build your financial future you can’t let emotions control. Persistently weigh and consider. Yes, identify what you like and don’t like, what you want and don’t want. Then attach a dollar price tag. Don’t think here and now. Think of your future returns. Throughout Mortgage Secrets you’ll discover dozens of property purchase and financing techniques. Each of these offers trade-offs. Some require effort, inconvenience, or discomfort that at first glance may seem unappealing. Please, though, leave that possibility in view until you’ve examined it closely. Do now what most people won’t do. In 10 years, you’ll do what most people never can.
Other Wealth-Building Ideas
Monday, July 13, 2009
Own a Rental Property; Boost Your Affordability and Wealth-Building
1
Now see how much more you could afford to borrow if you bought a fourplex, lived in one unit, and rented out the other three. Since your rental income from three units will expand your borrowing power, you could buy a property worth say $600,000 (instead of $250,000).
2
If each of these potential properties appreciates at 4 percent per year, and if after five years the mortgage balance on each falls to 92.5 percent of the original balance, you can see in Table 1.1 how your equity would build with each property.
The part home, part rental fourplex expands your affordability and boosts your networth by $173,250 (vs. $70,000 for the house).The fourplex more than triples your original cash investment.Although specific property
Table 1.1 5-Year Equity Buildup
# | Single-Family House | Fourplex |
Purchase price | $250,000 | $600,000 |
Amount financed | 200,000 | 550,000 |
Appreciated value @ 4 percent p.a. | 305,000 | 732,000 |
Mortgage balance year five | 185,000 | 508,750 |
Equity | 120,000 | 223,250 |
Original down payment | 50,000 | 50,000 |
Investment gain | 70,000 | 173,250 |
Practice Possibility Thinking
Sometimes you can even design and create a financing plan. Though most borrowers choose some off-the-shelf loan product, some lenders (and many sellers) will customize specifically—if you know how to ask, and what to ask for.
As you read through Mortgage Secrets and reflect upon the ins and outs of property finance, ask yourself, “Would this ideawork forme (us)?”Today, financing options exist for nearly everyone who wants to own a home, refinance a home, or buy an investment property. Know the possibilities. Cut wasteful personal spending. Shape up your credit profile. Lift your credit scores. Look for ways to reduce the costs of your loan. Explore the many paths that lead to alternative financing.
As you will see, possibility thinking pays big returns.
For the Answers You Need, Go Beyond Automated Underwriting
- What are your goals to build wealth?
- How do your household expenses differ (positively or negatively)
from the affordability assumptions imbedded in the AU computer
software? - Do you spend, save, and invest to achieve your life priorities?
- How long do you plan to own the property?
- How can you improve your credit scores?
- How can you improve your qualifying ratios?
- What percent of your wealth should you hold in property?
- What types of real estate financing (other than those offered by the
lender you’re talking with) might best promote your goals for cost
savings or wealth building? - What types of real estate financing (other than those offered by the
lender you’re talking with) might best enhance your affordability? - What type of property (fixer, foreclosure, duplex, fourplex, single-
family house, condo, apartment building, commercial, and so on)
might advance you toward your financial goals? - How much would a larger down payment save you?
- Should you use a fixed-rate or an adjustable rate mortgage (ARM)?
Given your situation, what are the risks and opportunities of each?
Which choice offers the best trade-off of risk and return (quickest
buildup of property equity)?
Although savvy loan reps can help you answer life-planning questions, the majority will not. The majority lack time, knowledge, and incentive to 4JWPR045-01 JWPR045-Eldred September 4, 2007 13:33 Char Count= 0 AFFORDABILITY DEPENDS ON YOU—NOT A LENDER guide you. Loan reps are like car salesmen. They encourage you to buy product(s) they are selling. Would you expect unbiased auto advice from the sales agent at the Honda dealer? No? Then why would you expect unbiased advice from the loan (sales) rep at the Old Faithful Mortgage Company?
Recall the theme of Mortgage Secrets: First, take measure of yourself. Learn your choices. Arrange your property purchase and financing decisions to advance your life goals. A majority of borrowers err because they attempt to minimize their monthly payment rather than maximize their wealth.
Most lenders compare income to monthly payments, but you need more depth, more vision. Decide for yourself: Should you buy more (or less) property than an AU system suggests? Should you borrow more (or less) than this lender’s guidelines recommend?
Selected Sources and Techniques to Achieve Affordability
Adjustable rate mortgages
ARM assumptions
ARM hybrids
Balloon mortgages
Blanket mortgages
Buy a duplex, triplex, or quad (tenants pay mortgage)
City down payment assistance
Co-borrowers
Co-ownership
Co-signers
Community reinvestment loans
Compensating factors
Contract-for-deed
County down payment assistance
Create value/fixer-uppers
Employer-assisted mortgage plans
Energy efficient mortgages
FHA assumable w/qualifying
FHA Title 1 home improvement loans
FHA 203(b)
FHA 203(k)
FHA 203(b) mortgages
FHA 203(k) mortgages
Fannie Mae affordable mortgage programs
Fannie Mae Community Home-buyers programs
Fannie Mae Start-up Mortgage
Fannie 97
Financial fitness programs
Freddie Mac central city mortgage programs
Gift letters
Government grant money
Habitat for Humanity homes
Homebuyer counseling centers
Homebuyer seminars, fairs, classes
HUD/FHA foreclosures
HUD homes with easy financing
Interest rate buydowns
Interest rate buy-ups
Interest only mortgages
Lease-options/lease purchase
Lease-purchase agreements
Mortgage credit certificates (MCCs)
New home builder finance plans
Not-for-profit grant money
Option ARMs
Owner will carry (OWC)
Pledged collateral
Private mortgage insurance (PMI)
Reverse annuity mortgages
Second mortgages
Self-contracting
Shared equity
Shared housing/housemates
State mortgage bond programs
State VA mortgage programs
Subprime mortgages
Sweat equity
Tenant-in-common (TICs)
USDA Rural Development Loans (formerly FmHA mortgages)
VA assumable w/qualifying
VA mortgages
VA REOs with VA financing for non-veterans
Wraparounds